Tax Reform 2020: Changes in Law No.466-IX

Law of Ukraine No. 786-IX "On amending the Tax Code of Ukraine as regards taxpayers' accounts functioning and simplification of procedures for individual entrepreneurs" (draft law registration No. 2524 dated 04 December 2019) came into effect on 08 August 2020.

Although the title implies that Law No.786-IX (the "Law") is only about the simplification of procedures for individual entrepreneurs, in fact, the Law also makes a number of amendments, as prepared by the Finance and Tax Policy Committee in June 2020, to previously adopted Law No.466-IX.

Some of the proposed amendments (for the most part, those related to the postponement of effective dates of certain provisions of the tax reform, for example, the entry into force of the controlled foreign corporations rules) were rejected during consideration of the Law at the plenary session. Consequently, the most of changes the postponement of whose effective dates has been previously contemplated (such as new rules of taxable profit determination for permanent establishments, taxation of transactions with shares and equity rights of foreign companies in Ukraine, etc.) will come into force on the dates specified in Law No.466.

The main changes introduced by the Law include the following:

Corporate Income Tax

• No CIT advance payments shall be charged on the amounts of transactions if such amounts are treated as dividends for tax purposes (the so-called "constructive" dividends as defined in Article 14, para. 14.1 subpara.14.1.97, 4-7 of the Tax Code of Ukraine).
• The Law gives a refined definition of reasonable economic purpose (business purpose). The volume of transactions to which adjustment applies remains unchanged (all transactions with non-residents).
• The Law removes the provision on non-recognition of fixed assets depreciation in tax accounting if such fixed assets are not used due to their modernization, reconstruction, extension, further equipping. 

Withholding tax

• The Law formalizes the mechanism of taxation of income from direct sale of shares (stakes) of Ukrainian companies among non-residents if the value of such shares is derived mainly from Ukrainian immovable property (sale of a stake in a Ukrainian company between two non-residents). Before amendments, Law No.466 set the taxation mechanism that should be applied only in case of indirect sale of stakes if their value was derived mainly from Ukrainian immovable property (sale of stakes in non-resident companies - indirect owners of immovable property in Ukraine). The provisions regulating taxation of income from indirect sale have been applied since 01 July 2020, and those regulating taxation of income from direct sale – from 08 August 2020.

Other changes

• The Law extends the terms for foreign companies winding-up without taxation of individuals' income (winding-up is to be completed before 31 December 2021). Such exemption applies to the income of individuals for 2020-2021 tax (reporting) periods (both in money and in kind) subject to certain conditions.
• The Law changes the procedure for applying and the amounts of penalties for non-compliance with registration deadlines / failure to register VAT invoices: (a) issued in accordance with Article 201, subpara.201.4, Article 199, Article 198, para. 198.5 of the Tax Code of Ukraine; (b) not issued to buyers; (c) issued to cover the transactions which are exempt from VAT or are subject to 0% VAT. 
• In case of technical failure or malfunctioning of taxpayers' accounts, the taxpayers may file their tax returns and other documents in hard copies. The Law clarifies some other aspects of electronic document flow between taxpayers and regulatory authorities.
• The Law formalizes the provision according to which the tax authority may not impose penalties if the taxpayer has corrected the mistakes by filing an amended return.